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Derwent Capital thinks so. The London investment
firm this week launched the first hedge fund that analyzes tweets
for clues about which way the market is headed.

Now, before I call my broker, I have to blast out the following
tweet: “It’s the end of the world! Sell! Sell! Sell!”

Actually, the idea may not be as screwy as it sounds. The basic
idea is to use proprietary software to comb through some million
messages per day on Twitter to gauge public sentiment. The $40
million fund bases its investment decisions on the general mood
captured in those tweets. A tide of “happy” tweets might augur a
bullish day later in the week, while a predominance of “sad”
messages might indicate a bearish swing.

Derwent was influenced in part by academic
research showing that running tweets through an algorithm can
help detect how investors are feeling. The resulting data in turn
predicted the direction of the Dow Jones Industrial Average with
surprising accuracy. As
Derwent founder Paul Hatwin told The Atlantic:
"For years, investors have widely accepted that financial markets
are driven by fear and greed, but we’ve never before had the
technology or data to be able to quantify human emotion."

Investor Reboot

Do we have that technology now? I’m not so sure. The problem
isn’t so much with software — companies already mine all sorts of
social media content to, say, track their ad campaigns or online
branding — although it’s worth noting that algorithms have a
disturbing tendency to go haywire (see “crisis, financial”).

The issue is hardware, namely the flesh-and-blood kind. Simply,
it’s hard to tell what folks are really thinking, let alone infer
their mood from 140 characters or less. The other thing is that
investors lie. If there’s money to be made by bombing the
Twittersphere with bogus happy talk, they’ll do it.

By definition, financial markets are also hard to predict. While
it may be possible to deduce what makes them tick up or down on
any given day — a downbeat jobs report,
strife in the Middle East, Arnold Schwarzenegger’s love child
— figuring it out over the long haul is much harder.

Relative to the flood of quantifiable and less tangible inputs
affecting the market at any given moment, even Twitter’s entire
daily content amounts to a tiny data set. Meanwhile, the advent
of high-speed trading, where computers make second-to-second
investment calls, raises questions about exactly what role human
emotion plays in moving the market. There’s a reason modern-day
trading floors are so quiet.

Surprise, Surprise

A sentiment algo is unlikely to be able to deal with
unforeseen events, and these are increasingly common.
Earthquakes, tsunamis, flash crashes, credit crises, volcanoes —
no one did a very good job of predicting any of these nor did
they accurately foresee the global fallout and
repercussions.

Who would have predicted that the largest one-week drop in
crude oil prices in history would occur just after Osama Bin
Laden’s death? The markets saw his death as bearish since a
source of geopolitical tension had been removed from the
equation. The fact that Libya, an oil-producing nation, was still
wracked by civil war — a much more bullish indicator — was of
lesser emotional importance at that time.

Of course, the real test for Derwent will be the returns it
generates for its investors. The firm is shooting for 15 to 20
percent. If that sounds good to you, don’t forget to tweet it.